Rental Property Investor · Howell, MI · Member since 2017 · 24 posts · 14 votes
3w
Dave, not so sure about your "new 1% rule" terminology on this one. One month of rent at $1000 divided by a mortgage payment of $1000 is 100%, not 1%. The rent is equal to 100% of the mortgage payment, not 1% of the mortgage payment. You could call it "the 1 ratio rule", but calling it a new "1% rule" is incorrect. You switch back and forth between calling it "the new 1% rule" and the "rent to payment ratio rule" in the podcast, which is confusing. Regardless of what you call it, a ratio of 1 is too low for cash flow by definition. There's no cash flow if 100% of the rent pays the mortgage. You need more rent than just enough to cover your mortgage payment if you want actual cash flow. On top of the mortgage payment, you need to include vacancy, maintenance, and cap ex set aside at a minimum. Even with those added costs in the denominator, a 1.0 ratio won't cash flow, though it could be a good deal. Just not a cash flow deal. Also, your claim that "half the deals are better than the average" isn't necesarily true. Half the deals would be better than the median, but not the average. For example, the average of 1, 1, 2, 3, and 13 is 4. Four values are below the average and 1 value is above the average. The high flyer skews the average. The median is 2. Two values are below the median, and 2 values are above the median. Correctly using "average" and "median" is imporant, especially in finance. Love the podcast, but the details in this one bothered me. Hope this helps with future shows!